$1.$ A firm required $$200$ million in financing, consisting of $$50$ million in bonds

and $$150$ million in equity. This $$200$ million was used to purchase assets.

After one year, the value of these assets will be either $$300$ million $($with a

$40\%$ probability$),$ $$220$ million $($with a $40\%$ probability$),$ or $$20$ million $($with a

$20\%$ probability$).$ Regardless of the outcome, the firm will be liquidated, and

the bondholders and equity holders will be paid from the liquidation value.

Bondholders are promised a fixed payment of $$60$ million. If the liquidation

value is less than $$60$ million, bondholders will receive the liquidation value

instead. There are no other stakeholders. Calculate the expected return

for both bondholders and equity holders.

$2.$ In our first lecture, we discussed how inflation $($expectation$)$ affects

financial market, especially the securities valuation. Please try your best to

explain several mechanisms through which inflation exerts impacts

on securities pricing.